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The Business of Fear

Past performance does not predict future returns. You may get back less than you originally invested. Reference to specific securities is not intended as a recommendation to purchase or sell any investment.

At Halloween we celebrate all things scary. In this episode of Global Infusions, Tom and Tom explore the business of fear. From films to theme parks, the horror industry is huge. The emotion of fear shapes human behaviour in everything from advertising to investing FOMO. They also discuss Google's latest revelations, antitrust cases and fake restaurants.

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TR: Hello, I’m Tom Record and I’m here with Tom Hosking. Welcome to Global Infusions, an investment podcast from the Liontrust Global Fundamental team that takes a long-term view of today's stories.  
Last episode we chatted about the business of the microbiome from bacteria in your gut to healthy fermented foods and the new drugs of the future. This episode we’re looking at fear – from spooky Horror films to the fear of missing out. If your taste buds are tickled or you have any questions for our next episode, please do send them in via your client contact or through the contact us link on the Liontrust website. 
So sit back, grab a cup of tea, and remember that when we talk about individual companies we are not making a recommendation to buy or sell shares and that some of these companies may not be held across Liontrust’s global fund range. 
TH: So as we’re recording this episode the day before Halloween, we thought it would be fun to look at all things scary. Tom will you be trick or treating tomorrow night?
TR: Indeed we will. The children love it – a heady combination of costumes, dressing up as skeletons and witches, and of course, importantly the year’s supply of sweets that they pick up in one night.
TH: Yes, Halloween does seem to centre around sweets, or candy to our American listeners. In the US, where Halloween is clearly celebrated most passionately, the grand total of sweets bought at Halloween totals 300 thousand tonnes! 

TR: Woah – 300 Thousand tonnes?

TH: Yes, That's equivalent to the weight of 6 Titanics!
TR: Wow that's a lot of ship and a lot of sugar. So with a population of just over 300m, that must be what… a kilogram of sweets per person?
TH: Yes exactly! And the amount per child will be even higher.
TR: I'm glad to say my children will probably stop at a small pumpkin bucket load. Though last year my son did get a double load as his “trick or treat” was followed by requests for something for his sister who was stuck at home with Covid!
TH: Ha! He must have been thrilled with that!
TR: Yes he was, and he did share all the booty with her. Now, trick or treating is rather a strange tradition when you think about it. It feels like blackmail to threaten some act of vandalism unless a payment of sweets is made!
TH: I agree it's a slightly odd message for children! And the economic impact of the tradition is not insignificant. For insurance companies, there is a rise in vandalism claims of over 60% at Halloween. And a 10% increase in theft claims too.
TR: That's much worse than I expected, Tom. 
TH: Yes, it is mostly a friendly family holiday nowadays but some crime does still happen.
TR: I think the more worrying effect is on accidents. In the US, Halloween is the worst day of the year for pedestrian fatalities. The American Medical Association looked at 42 years' worth of data and the found the risk of it increases by 43% on Halloween.

TH: I understand it’s a combination of more people walking around neighbourhoods than normal and a big increase in drink driving on the day, by up to 60% sadly. And the dark costumes that some people wear can't help either.

TR: So where does this strange tradition come from? Most people think it’s an American invention but isn’t it actually originally a Celtic festival that is now being reimported back to Europe? 
TH: Yes that’s right, the Celtic festival was called Samhain (pronounced Saawen) and the original rituals of costuming and lighting fires were designed to ward off ghosts.

TR: Ao where does the name Halloween come from then?

TH: Well about a thousand years ago, the western Christian churches decided to have a feast at that times for all the saints they couldn't fit into the other days of the year, especially martyrs. It was called All Saints Day, and Hallow is another word for saint.

TR: Ah that's why it's called All Hallows Eve.
TH: Yes exactly. And they combined this with remembering the dead because it was a mediaeval idea that you could pray for your ancestors in purgatory. And in catholic countries, that idea goes on to the present day.
TR: Hence the ‘day of the dead’ in Latin America. And all souls day here in the UK. It's interesting that it was a pagan festival first before becoming Christianised.
TH: Yes there was always a festival at this time of year, for two reasons really. First, it was a time of plenty: The harvest was in, you'd brewed the beer and you would slaughter the animals you couldn’t feed during the winter. 
TR: So you could have a proper feast.
TH: Indeed. And secondly, the division between autumn and winter would have genuinely been a scary time. Winter was a killer. The season could mean greater risk of hyperthermia or disease, which at the time were thought to be brought by evil spirits.
TR: Hence where the horror comes from. And we have had a reminder of that in the last couple of years with the covid pandemic, a reminder of how dangerous winter can be.
TH: Yes exactly. 

TR: I think I prefer the modern version of Halloween where we are safe from Winter. It’s interesting that humans are the only species that seeks recreational fear. 

TH: That presents itself in many domains of life from small children playing games of chase to adults indulging in extreme sports or rollercoaster rides. Theme parks alone are a huge industry, and one of the most profitable parts of Disney.

TR: So when we experience a real threat, or something we think might be a threat we get a feeling of dread, anxiety or panic.

TH: Exactly – You react with a fight or flight response which releases a flood of chemicals like adrenaline endorphins and dopamine. Your body is giving you energy, it’s protecting you from feeling pain and shutting down non-essential systems so you can focus on the danger. 

TR: And it’s when you’re in state of fear, your senses are heightened  and distracting feelings like hunger are supressed. In the absence of a real threat, it can feel pretty good. 

TH: Yes that feeling of adrenaline can be a real rush. And Scientists think there is a second attraction where some people like the challenge of making it through the fear- it gives them a sense of accomplishment and an insight into themselves.

TR: It helps explain why the horror industry is so much bigger than Halloween. Horror is a huge genre in film, TV, books and video games, and more.  Horror films are fascinating because it’s usually the best genre for financial returns.
TH: Yes, horror films have a keen and loyal fan base which ensures a steady revenue stream for studios. Fans want their fix of horror, they want that shot of adrenaline. It's like an addiction.
TR: The horror director, Ben Wheatly, described it well when he explained the genre's appeal as "half story but also half experience. It's like a rollercoaster, it's entertainment. It terrifies you, but you still know that you're safe".
TH: And that's really attractive for a film studio when you couple it with the fact that you can make a film on a small budget. You only need a few actors in a haunted house to make a film. So when you get a hit, the profit margins can be huge.
TR: I guess that's why quite a few famous directors initially cut their teeth on horror such as Steven Spielberg and James Cameron. 
TH: It's an accessible genre because the funding requirements can be lower.
TR: Yes indeed. As an example, take Viacom's Paramount Pictures, who had two hit films in 2018: 'Mission Impossible: Fallout', the latest in that series, and the horror film 'A Quiet Place' starring husband and wife duo Emily Blunt and John Krasinski.
TH: That's the film where a family have to be silent because earth has been invaded by monsters with super-acute hearing.
TR: Yes exactly. It's not too bad a plot as horror films go. Both films were big hit. For example in the US box office figures alone,  'Mission Impossible' grossed about $220m and 'A Quiet Place' grossed $190m. But while Mission Impossible had a production cost of $178m, A Quiet Place's costs was just $17m. 
TH: Wow that’s a huge cost difference. 
TR: Well, action movies have loads of real stunts and have to be a big hit worldwide to make the numbers work. Remember movie studios only get 50-60% of the domestic box office receipts and 20-40% overseas. The rest goes to cinemas and distribution partners. And you also have marketing costs which can be very large. 

TH: Do you know what the most profitable film ever is?
TR: Well I know Avatar and Titanic where phenomenally successful but given where our conversation is going, I imagine it's a horror film?
TH: Yes you're right. And it depends on how you define profitability but if you are simply comparing  production cost to total box office receipts, the 2009 film 'Paranormal Activity' takes the prize. It was a big hit grossing $194m worldwide at the box office. But guess how much it cost to make?
TR: I don't know... I’m going to low ball it at $1m?
TH: Unbelievably, it only cost $15 thousand dollars to make.
TR: What really!? 15 thousand dollars to make a film that grossed 194 million?
TH: Yes – only in Horror!  And I'll save you from looking at your calculator. That's a return on investment of 1.3 million percent!
TR: There must have been almost no film crew at all.
TH: It made the film producer Jason Blum a fortune and he started a production company off the back of it called Blumhouse productions, that specializes in making these low costs films.
TR: Has it worked? Has he been able to replicate that initial success?
TH: Yes, they churn out low costs films and although 40% of them tend to fail, the rest work and some are really successful like Get Out, the 2017 film, and Whiplash which won 3 academy awards.
TR: It sounds like a venture capital model, making loads of small bets and you only need a couple to come off big time.
TH: Yes that is the right analogy. He has 3 rules for making films. Rule number 1 is Not too many speaking parts. Extras are unionised and they are paid $100 a day (or at least that was the figure several years ago), but if they say even just one word, you have to pay them an extra $400.
TR: Ah so if say the waiter, for example, doesn't say a single word, it's because otherwise it would cost five times more?
TH: Yes exactly. Rule number 2 is not too many locations, and ideally just one house.
TR: There's also something scary about it being your home because that's where you might feel most vulnerable.
TH: Yes it works well doesn't it. And rule 3 is you pay everyone, actors, directors etc. as little as possible up front and give them profit shares in the film instead, so they only do well if the film does well.
TR: Makes sense to keep fixed costs as low as possible.
TH: The question is why doesn't everyone do this?
TR: Well studios are doing more horror films. So, horror films as a proportion of all films ever made has been steadily rising over the last two decades from 5% to over 15%. But the reason they are not doing more is that they are risky. The films are very hit and miss, so you can end up making big losses. Not everyone is as strict with their budgets as Jason Blum!

TH: Yes and that’s why you get a hit, studios milk it for all it’s worth. There are 8 films in the Saw franchise, 9 Nightmare on Elm streets and there are 12 Friday the 13ths.
TR: There is also an agency problem in that producers and directors have other motivations. It's more fun to do a big Hollywood blockbuster with lots of car chases and other toys. When you are spending hundreds of millions, you’re important, you can’t do that many films and you can’t afford to fail. 

TH: And there is more prestige that comes with artistic films. Horror is looked down upon in Hollywood circles.

TR: But fear engages people viscerally and that can be used in all sorts of industries. Take news media, bad news is more captivating than good news. Hence the phrase: ’If it bleeds, it leads’.  
TH: On the topic of fear being a useful tool, I have a quote for you Tom. Let's see if you can guess where it's from: "Advertising is based on one thing: happiness. And do you know what happiness is? It's freedom from fear"
TR: I don't know… An ad executive like Martin Sorrell?
TH: That Tom, is Don Draper from the first episode of the hit US TV series, Mad Men. 
TR: Ah, but it does sound like a genuine quote from a real ad exec. Fear is a strong human emotion so it makes sense that advertisers would try to tap into that and take advantage.
TH: Yes exactly. A good example of that is antibacterial soap, where there is almost no difference with the traditional bar. Soap used to be sold as a luxury, think of imperial leather soap. But against a background of epidemics like bird flu and SARS, fear drove consumers to antibacterial soaps such as Carex.
TR: The soap owned by PZ Cussons.
TH: Yes exactly. The transparent bottle they have with blue soap is designed to look very medical.
TR: The success story of Listerine is quite similar. It was originally an antiseptic used for a wide variety of things - dental hygiene was just one of them. And then in the 1920s they had the bright idea to transform bad breath from a minor personal imperfection to a medical condition, halitosis, that urgently needed treatment. The marketing campaign was remarkably successful and we still use it for that purpose today.

TH: That has definitely worked. The fear of risk is such a good selling tool. It’s the basis of the whole insurance industry really.

TR: True, it’s definitely not just medical. In the car industry, no doubt one of factors behind the growth of SUVs is that they are seen as safer. They are big cars, with a high vantage point from which you can spot danger.

TH: The irony is that they are arguably more dangerous because they are more likely to roll over than low cars.

TR: Well quite, but it’s the size and  illusion of safety from the outside world that makes them attractive. No one needs off-road 4x4 capability in a city.

TH: Agreed. One last thing we should mention on fear is its application to investing. When a share price halves, it is a natural human emotion to panic and sell but that isn’t always the best thing to do.

TR: Yes, fear can stop you thinking rationally. When an anxious brain process ambiguous information, it tends to choose the most pessimistic outcome from the various options. You assign higher probabilities to alarming possibilities. 

TH: It’s why when you walk down a dark street, you start questioning whether there is a sound of footsteps behind you.

TR: Indeed. In investment, that’s why you need to stay calm and focus on the fundamentals of what you’re invested in. Tom that’s how you concluded your article last year on the artist Edvard Munch and investing, what was it called again?

TH: The title was ‘Screaming to explore’.

TR: Yes, that’s the one. Anyway, if you simply buying or selling depending on how you feel after the share price has moved, it’s tough to make a rational decision. 

TH: We haven’t mentioned the fear of missing out – or FOMO.

TR: Yes – the name is pretty self-explanatory!  It could easily be one of the biggest emotional biases that investors have and is a driver behind many of the investment bubbles we’ve seen through history.

TH: Everyone feels they need to get in on the next investment craze.

TR: Exactly – they are fearful that they will miss it.  I was chatting the other day with some investors who felt there was a definite FOMAI at the moment.

TH: OK, what’s FOMAI?

TR: Fear of Missing AI!  So much is written about AI, but people are still working out how to involve it in their workflows and day to day life.  There is a bit of fear that we’re not doing enough with it yet.

TH: And before we move on from fear – we have to mention fear in politics – and of course, project fear…

TR: Yes, so as a reminder, this was a campaign to push voters to reject the status quo in the Brexit referendum, and the Scottish independence referendum before it. 

TH: So the group pushing for Brexit claimed that the bad scenarios that ‘remain’ was suggesting if Brexit happened, were just made up to make us feel fearful and that reality would be much better. 

TR: Yes, it’s a bit of a play on a second derivative of fear: so people not wanting to appear afraid… anyway on that note, shall we move onto the news? Tom, what have you got for us this episode?

TH: So first up from me is a statistic that has come to light during the ongoing Google antitrust trial in the US. As you know Google pays other companies to be the default search engine on browsers, phones etc.. It's come to light that the total figure that they are paying per annum is $26 billion. For context, that's about 16% of its search revenue and about 29% of its advertising profits.
TR: That’s a big cost item, and most of it will surely be going to Apple?
TH: Yes exactly. The US department of justice is arguing that securing default status everywhere makes the market anticompetitive. 
TR: The interesting question is what would happen if Google, or its parent Alphabet, wasn't allowed to strike these default search engine deals.  Would people just continue using Google? After all the top search term on Microsoft's search engine Bing, is ‘google’.
TH: Indeed. Being the default is obviously valuable but Alphabet could become more profitable, in the short term at least. And the likes of Apple would lose a revenue stream.

TR: And remember that Apple talks a lot about privacy and how it tries to stop anyone else getting information on you.  Well, a large part of the reason search is so valuable is that it can give a good picture of who the user is.

TH: And Apple gets tens of billions of dollars a year from Google by selling that privileged position.  A case of do as I say, not as I do…

TR: Ok next up from me is a story that resonates with one we talked about a year or so ago about a fake restaurant in someone’s garden shed in London.

TH: Oh yes I remember.

TR: Well the idea has been taken to next level and infiltrated the New York fine dining scene. This was a bit more accidental. Some friends would get together for steaks every fortnight and as a joke one of their friends put Mehran’s Steak House on Google maps… then they left glowing reviews.

TH: I can see where this is going! 

TR: Exactly – they ended up as a top rated restaurant in New York. So they made a website with a waiting list.

TH: Cool.

TR: And then they managed to hire a venue and do a pop up restaurant with 140 reservations.  They had no idea what they were doing, having never run a restaurant before, but it went well and they had a lot of fun.

TH: It shows the importance of Google and reviews, and I suppose, how easily they can be gamed.

TR: So Tom – when it comes to competition concerns, it’s important to define your market.

TH: Absolutely, depending on who you are talking to, Amazon either has 40% market share of online retail or 6% of total retail sales.

TR: Yes, a huge difference. Well, one survey that broker Piper Sandler does twice a year looks at teenagers and their habits in the US.  So what market share do you think iPhones have in US teenagers?

TH: I think it’s high.  Maybe 75%?

TR: Very close, it’s 87%. Which is as close to a monopoly as you can get in a tech product.  And on top of this over a third of US teenagers also have an Apple Watch.

TH: Staying on the antitrust theme.  Did you see the latest on Microsoft’s acquisition of Activision?

TR: Yes – this was knocked down in both the UK and the USA and after pressure and a few small tweaks, those decisions were reversed.

TH:  And $69bn later, Activision is now finally part of Microsoft.

TR: An impressive bit of stamina was needed to navigate through that…  And with that it’s time to say goodbye.  

TH: Thank you Tom. Before we say goodbye, the listeners should know we are going to tweak the format next month and rotate through different co-hosts.
TR: Exciting. So who will you be chatting with next month?
TH: Well I think we should leave it as a surprise. The listeners need a bit of suspense in their lives!
TR: Well on that cliff-hanger, it's been a pleasure as always and thank you for listening to Global Infusions – a podcast that believes that the best discussions are had over tea and cake. We hope you've enjoyed your cuppa and our thoughts on the Fear. Please do subscribe through Apple or Spotify and with that we wish you goodbye! 
TH: Goodbye!

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This should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets. It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, forwarded, reproduced, divulged or otherwise distributed in any form whether by way of fax, email, oral or otherwise, in whole or in part without the express and prior written consent of Liontrust. Always research your own investments and if you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances. 

Tom Hosking
Tom Hosking
Tom Hosking is a Co-Fund Manager of the International Equity, Global Balanced, Global Alpha and Global Smaller Companies funds. Tom joined Liontrust in April 2022 as part of the acquisition of Majedie Asset Management, where he was an Equity Analyst and Co-Fund Manager for eight years and is a member of the Liontrust Global Fundamental team.

Tom holds a Master of Arts degree in Economics from Corpus Christi College, Cambridge and is a CFA Charterholder.

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